Babies And Bathwater: Innovating Around The Nature Of Insurance

Innovation Insights

If people understood the nature of insurance, how would that impact behavior?

When I stop and think about where the life insurance industry is spending energy, I wonder if the balance is a bit off. In my experience, most energy is spent on making products less expensive; making products easier to get/less invasive and time consuming; making a better case for permanent insurance; and making disclosures “bulletproof.”

Of course we agree that these things are important. While perhaps counterintuitive, is it possible that our obsessions with the above come at the expense of what really makes life insurance work?

In a previous NU article, I discussed the nature of insurance as “weird.” Weird doesn’t mean bad, it just means different from how today’s consumer thinks about other products and services. In order for the model of pooling and sharing risk to work, there are some things that come with that territory. With weird comes wonderful.

Some of those things include the need to gather good information about risks and the need to price appropriately for a really long tail promise. Without the right information, we can’t be as smart as we would like to be about how the numbers will ultimately pan out.

Taking away cost and/or information is sort of like a toothpaste tube with the cap on: If you squeeze one side, there is an equal and opposite effect on the other, and we don’t get any more from it.

Others include the need for behavioral incentives, such as cash values and dividends, as well as tax benefits. This is not unlike a “spoonful of sugar to help the medicine go down.”

Back when these incentives were created, the intention was so that people would keep their policies in place for the long term and see some benefits while they are alive. This helps society overall if everyone does their part.

How about the need to protect deep pockets? The amount of money in those pockets impacts everyone, not just those who work for the company. It’s about being good stewards.
However, when you look at where the energy is spent, it’s actually on an effect, not a cause. The effect may seem negative, but the cause is actually positive (reread the above if you missed it). It’s why I think too much of that activity is actually “throwing the baby out with the bathwater,” hence the title. (Finally, she gets to it!)

To summarize, I see the effect as bathwater and the cause as the baby:

The effect is demand for less expensive products. The cause is a long tail promise.

The effect is the demand for less invasiveness. The cause is that the more information we have, the better job we do.

The effect is that many people reject whole life insurance. The cause is that it requires higher premiums in order to deliver much more in return.

The effect is that people complain about a lot of fine print. The cause is that insurance companies need to protect the pools of money from those who will seek more than their fair share…just because they can.

What does that mean for how we expend our energy? Where is the innovation opportunity? I think it is clear.

We can’t ignore the effects, but perhaps we can spend a little more time helping the public understand and engage around the causes, which may have an ultimate, positive impact on the effects. If people understood the nature of insurance, how would that impact behavior? It calls for completely new types of transparency and communication.